Microsoft continues to push the social networking and entertainment capabilities of the Xbox 360–games on demand and group movie viewing are two such features due in the next system update (due in August). We asked Shane Kim, Microsoft’s VP of Strategy and Business Development for Interactive Entertainment, about the evolution of Xbox Live and what the launch of Project Natal means for the business.

In the June NPD numbers, the industry showed a significant drop year-to-year. Yet, Xbox 360 is the only console with sales up this year. What do you contribute that resiliency to?

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It certainly helps to have the most affordable console on the market today, with the Xbox 360 Arcade version at $199. But it’s not just price alone, but in the totality of the experiences that we are delivering. Since we launched the New Xbox Experience and Netflix functionality last year, we continue to add more than 500,000 new members to the Xbox Live service every month. We are up to over 20 million members on Xbox Live worldwide. These are people who have logged on to the service in the last six months, not just anybody that’s ever signed up. And we just got more in store, in terms of continuing to drive growth. We are the only console that’s up for 2009 over 2008, for the first six months of the calendar year. Which I think is pretty impressive given the environment and is a testimony to the value and the pricing we are delivering to customers.

To make Xbox Live the next-generation social and entertainment network. That’s been our strategy from the get go, even going back to 2002 when we launched Live. That was considered a fairly risky thing and a big strategic move. Which today, has paid dividends many times over. We are expanding beyond the base that we established with gaming and multiplayer gaming on Live by adding more entertainment options–last.fm, instant-on 1080p HD streaming video, the Netflix partnership, etc.–but we also want to help people connect to their friends. It’s important that Xbox Live is not viewed as an island, but something that integrates well with other social networks–so Facebook and Twitter integration is very important–as well as making sure that you can get to the entertainment you care about, either within your own home or through services like last.fm, Netflix, or the Zune video service. It’s part of a very deliberate strategy and you’ll see us continue to do more in the social and entertainment spaces.

With the new dashboard update comes the Games on Demand store to download full 360 games. Why is Microsoft launching that now?

We’re big believers in digital distribution, everything from downloadable content for games, to Xbox Live Arcade games, to the Xbox Originals. Now we are going to be delivering Xbox 360 games. This is a natural next step in the evolution of digital distribution. But we’re also big believers in retail distribution as well. Everything we’ve done in digital distribution spaces has expanded the market, has not been a share-shift between retail and online. And we think the effect will be the same thing here. It’s a natural evolution, not only of the capabilities of the service, but the expansion of the business model that we offer, not only internally, but to our business partners.

Many of the titles are games with sequels coming. Is the main strategy behind Games on Demand marketing, or is the strategy to provide a service that is more beneficial to developers and players than buying retail?

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It’s not about trying to share-shift from retail to direct online distribution. That’s not it at all. One of the benefits of what we’re doing, that you pointed out, is that it can be a great marketing tool for publishers. And remember, this is not an exclusive to Microsoft Game Studios; it’s a service available to all publishers. It can be a great tool to reintroduce their franchises, especially the ones they care about having long-term additions for. It really is about expanding the options and the choices for consumers, and will have great benefits for publishers and the entire ecosystem.

Are there plans in 2010 to offer full downloads with new titles, concurrent with retail?

There are a lot of complex issues to deal with here, especially if you start talking about day-and-date release with retail availability–which is not something that we’re talking about at all, today. And publishers have to do some technical work in order to enable this. There will be decisions that publishers have to make from a business standpoint. But when it comes to us saying we want Games on Demand to enable day-and-date release of new titles, then there’s certainly a lot of work we would need to go through. We’re not anywhere close to that world today. We have great relationships with the retail channel–they’re important partners. We sell a lot of hardware and software through retail channels. We have to be smart about how we approach this business.

One 2010 strategy that has become well publicized is Project Natal. You have said that Natal’s release will be handled with the same gravitas as a console launch. Why has that stance been adopted?

Project Natal is something that doesn’t come along very often in our industry. It’s captured the imagination of people all over the world, in our industry and outside it. We look at it as a game-changer. It’s less about competing with Sony and Nintendo, and more about breaking down the barriers to the industry and inviting the hundreds of millions of people who don’t participate in what we do to come enjoy what Xbox 360 and Xbox Live have to offer. I’ve been lucky enough to be here for the launch of Xbox 360, Halo 2, and Halo 3, and this is going to be just as big in terms of consumer excitement, importance to the industry, and certainly importance to Microsoft.

The launch of Natal promises a longer life for the 360–a stance that seems like Microsoft is adopting Sony’s outlook on the 10-year console cycle. How much of that strategy comes from the recession making it unwise to launch an expensive console, and how much of that comes from the current success of the 360 not making a new console necessary in a business sense?

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It’s not about copying Sony’s model–perhaps we should’ve said 11-year life cycle instead. [Laughs] There’s no question that Sony’s benefited from a long life cycle for PlayStation 1 and PlayStation 2–that’s to their credit and that’s an enviable business. And it has nothing to do with the recession. It really has much more to do with your latter point: the innovation and longevity that will be created when Project Natal is added to that mix and the value and the entertainment options that we continue to expand on Xbox Live. The “next generation” will be defined by software and services, not hardware.

In the past we would always get this question, “Hey, there’s a new console launch every five years and you’re coming up on that time for Xbox, right?” That’s the old treadmill way of thinking. Before you had things that were very obvious, from a hardware standpoint–pushing more pixels, the move from 2-D to 3-D, 3-D to HD, etc. We got a very powerful piece of hardware in Xbox 360. I am confident that we have more headroom available, in terms of developers and creators figuring out how to get more out of the system. So I worry less about new hardware having to enable us to move to a different level of graphics. It’s much more about the experiences that you are going to deliver. That’s why I think we’re very well-positioned, competitively speaking, because Microsoft is a software and services company.

Speaking of software and services–comparing how Xbox Live started on the original Xbox, to how it was at the 360 launch, to how it is now and with the coming updates, Microsoft is changing the console to fit that label as “center of the living room.”

That has been our strategy from the start. We knew we couldn’t just say, “Hey, here’s the new center for home entertainment!” Being able to build from the base that we have in the gaming business and expanding beyond that, not only with Xbox 360, but with Xbox Live is so important. We are not just trying to launch this nebulous consumer-entertainment thing. Xbox is firmly routed in an important consumer entertainment pillar, which is gaming. But clearly it is going to expand to other realms of home entertainment and social networking. It’s not difficult for customers to go, “Hey, this used to be about Halo matchmaking. Now it’s really about Halo matchmaking, connecting with my friends on Facebook, and watching movies with my friends on the same couch and across the world.”

About the author

His work has also been published by Kill Screen, Tom's Guide, Tech Times, MTV Geek, GameSpot, Gamasutra, Laptop Mag, Co.Create, and Co.Labs. Focusing on the creativity and business of gaming, he is always up for a good interview or an intriguing feature.